After ‘secret’ commissions paid to dealers by lenders were ruled unlawful, billions might be available in compensation.
UK lenders are scrambling to assess the fallout of last week’s landmark court of appeal ruling on car finance. The judgment on “secret” commission payments could have far-reaching implications for lenders, beyond those covered by an continuing investigation by the Financial Conduct Authority (FCA).
The consumer champion Martin Lewis suggests the row “has the potential to shake up more than just car finance”, but then again he does love a bit of drama.
So what has happened with car finance?
The FCA launched an investigation into discretionary commission arrangements (DCAs) on car loans issued between 2007 and 2021.
The practice meant car dealerships and brokers had the power to set interest rates on car loans, and earn higher commission along the way. DCAs were eventually banned by the FCA in 2021 because of concerns they were incentivising dealers to charge higher interest rates.
Then on Friday, the court of appeal ruled on that test case, upholding a decision that it was unlawful for the two lenders to have paid a “secret” commission to car dealers without borrowers’ knowledge.
Payout on car finance
Some lawyers have speculated that customers could collectively receive billions of pounds in compensation as a result and in some cases have their car loan written off or rescinded.
It could also spark complaints and payouts about other types of commission payments related to motor finance and potentially other loans and financial products.
Potentially millions of people. Across the UK, an estimated 80% to 90% of new cars, and an increasing number of used vehicles, are bought with finance, and lenders issued £16.9bn in car loans last year.
In terms of the FCA investigation, you could be entitled to a payout if you used motor finance to buy a new or secondhand motor vehicle – for example, a car, van, campervan or motorbike – between 6 April 2007 and 28 January 2021, and the finance provider and car dealer used a DCA. When we say motor finance, we typically mean personal contract purchase plans and hire purchase.
DCAs were by far the most common commission arrangement before they were banned in 2021, and were included in three-quarters of all loans between 2007 and 2020.
Could you be entitled to a payout after court ruling on car finance? well it is a straightforward procedure and you could be entitled to thousands, wouldn’t that be nice!